TIPS WILL BE TAX FREE FROM 2025 TO 2028

For millions of workers in the service industry, tips are a major part of take-home pay. Starting in 2025 and continuing through 2028, you will not pay federal income tax on your tips. 

This historic policy change aims to boost income for hospitality and service workers. At Liberty Tax, we are ready to help you understand how to take advantage of it. 

Which Tips Are Included 

The exemption applies to: 

• Cash tips
• Credit card tips
• Digital tips via apps or POS systems 

Whether you are a server, bartender, hair stylist, or delivery driver, your reported tip income will be exempt from federal income tax for this four-year period. 

What Is Still Required 

• You must still report your tips to your employer and the IRS
• FICA taxes (Social Security and Medicare) still apply
• Employers must still include tips on your W-2 for recordkeeping 

Failure to report tips can lead to penalties—even during the exemption period. 

How This Affects Your Tax Filing? 

• Your take-home pay increases, but your year-end refund may be smaller if you rely on withholdings
• You may need to adjust your W-4 or withholding if you receive additional non-tip income
• Your eligibility for tax credits like the Earned Income Tax Credit may change slightly 

Who Cannot Deduct Auto Loan Interest? 

W-2 employees cannot deduct car loan interest, even if you use your vehicle to commute or travel for work. 
The Tax Cuts and Jobs Act suspended unreimbursed employee expenses through at least 2025.